World’s Biggest Banks Back Fossil Fuels As Climate Pressure Rises

Through Nicholas Comfort and Steven Arons to 12/06/2021

(Bloomberg) –With barely dry ink on a historic commitment by the financial sector to tackle climate change, the world’s biggest banks are making it clear that they plan to back their customers with fossil fuels.

Take JPMorgan Chase & Co., the leading bond arranger for oil, gas and coal companies. In the weeks since the bank joined Mark Carney’s global alliance to achieve zero net issuance through finance in October, it has underwritten some $ 2.5 billion in corporate bonds. like Gazprom PJSC and Continental Resources Inc., which is equivalent to the same period in previous years. .

Wells Fargo, which Bloomberg data shows as lending the most banks to fossil fuel companies, is on track to double the amount of credit it has extended to the industry this year.

In total, global banks led by the Wall Street titans have helped fossil fuel companies issue nearly $ 250 billion in bonds so far in 2021, a figure that also roughly matches the collection of average annual fund for the industry since 2016. And while the International Energy Agency argues that funding for new oil and gas must stop now to avoid catastrophic climate change, bankers counter that polluters have need help switching to new sources of energy.

“You can’t do without it, because the world still relies heavily on fossil fuels for the vast majority of our energy demand,” said Marisa Buchanan, global sustainability manager at JPMorgan in New York. “It’s really important that our customers take action to innovate and decarbonize, but we also need to bring capital to the table to bring these solutions to market. “

Conventional energy

This is an argument repeated throughout the financial industry. Most agree that there is a need to fight rising temperatures, but hardly any of the world’s major banks are prepared to shy away from profitable fossil fuel customers. Moody’s Investors Service estimates that banks, insurers and asset managers in the world’s 20 largest economies still have around $ 22 trillion exposed to carbon-intensive industries. The rating company also claims it is a business model that exposes banks to risk of loss as global warming progresses.

How quickly lenders transition to finance a low-carbon economy will play a major role in determining the planet’s chances of avoiding a cataclysmic degree of overheating. And scientists have calculated that the current decade is the last chance humans have to prevent more than 1.5 degrees of warming. So far, executives stress that they have no plans to abandon customers anytime soon if they can help.

“The most important thing is to help our customers on the journey they are about to take as they retool their industrial base from old technology, carbon heavy, to new technology, light carbon or carbon neutral. HSBC Holdings Plc CEO Noel Quinn said in an interview with Bloomberg Television.

Tension in the conference room

Meanwhile, scientists are issuing increasingly alarming warnings as CO2 continues to spew into the atmosphere. Even if the latest round of climate commitments materialize, the world is still on track to disastrously rise 2.4 degrees Celsius by the end of the century, according to Climate Action Tracker.

For many banks, the pressure to redirect loans and underwriting without losing business is fueling tensions in the boardroom. Executives from several major global banks, speaking on condition of anonymity, revealed that sustainability executives and commercial bankers often disagree on how to strike a balance between revenue goals and climate goals. Often, sustainability staff lose the point, the people said.

In Europe, where policies are targeting the world’s most ambitious green finance rulebook, a few banks are indeed starting to say no to large customers. ING Groep NV has pulled out of a revolving credit facility for German coal-fired power producer RWE AG, people familiar with the matter say. The 2019 ruling, which the bank never made public, was sparked by environmental concerns, people said. An ING spokesperson declined to comment on the decision.

Lenders who already have processes in place to manage the conflict are more open about how to manage this tension between profits and environmental goals.

“When we change or revise our policies, we need evidence of the impact on potential income losses,” said Roberta Marracino, head of ESG strategy at UniCredit SpA, Italy’s second-largest lender. “There is an impact from a business point of view that must be taken into account. This is also taken into account when we discuss specific agreements and in specific cases we say ‘no we will not’.

European banks will also be faced with climatic stress tests next year which could indirectly lead to higher capital requirements. And more regulatory control concentrates the minds. But the transition to a low-carbon future is still in its infancy, according to assessments by the European Central Bank.

Lenders have started asking clients for transition plans, including more details on their carbon footprint. Yet, according to executives at some of the polluting companies, who have declined to be identified by name when discussing private conversations, the questions they are asked tend to be largely superficial.

In some cases, companies have simply pointed their bank to a web link for a sustainability report in order to respond to inquiries about environmental risks, according to officials at energy and industrial companies.

State-of-the-art financing

Still, the scrutiny of regulators and the public means that banks may be reluctant to increase fossil fuel funding, and aggregate funding may have peaked.

The volume of bonds arranged for the industry as well as the amount of bank loans granted are expected to decline this year compared to last year, when the pandemic boosted demand for liquidity. Banks are also implementing restrictive lending policies for worst climate violators, especially in coal mines, and taking a more conservative view of dirtier power generation.

Ecological financing

In addition to the data presented here, banks organize financing tied specifically to green projects by fossil fuel companies, although these companies still issue larger amounts of conventional debt. Investment bankers make a lot of money funding green projects across the economy, which this year overtook oil and gas funding for the first time. JPMorgan says it now earns more by underwriting ESG debt than by arranging bonds for fossil fuel companies.

This surge in the industry has coincided with skepticism about labeling, as green derivatives, rests, and other poorly or unregulated products proliferate. And climate activists such as the Sunrise Project say that for banks, reporting the green financing they are making while supporting polluting industries is a “distraction.”

Ultimately, much of the financial sector has committed to decarbonizing balance sheets, but money from polluting industries continues to flow. Bankers say civil society must be patient.

“Society needs to understand that we are supporting transitions,” said Cornelius Riese, co-CEO of German DZ Bank AG. “Our entire economy and our ecology will have a problem if our industry is forced for 12 or 18 months to eliminate all the companies in our portfolio that are not purely green.

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